What OEMs need to know about reshoring manufacturing and their supply chains

Many OEMs are now bringing their final assembly operations back to North America. That’s good news for the blue collar workforce but what about the supply chain partners back in China and other low cost locales? Can OEMs find new suppliers close to home? Should OEMs use the old suppliers and manage the value chain better to deal with a longer pipeline? OEMs also have to be cognizant of expectations from the financial community to increase return on investment in supply chains.

“What’s going on is the construction of regional theaters of supply in which manufacturers source more products in the region near a major consuming market for reasons of speed to market,” says James Cooke, principal analyst, Nucleus Research, and author of the book Protean Supply Chains. “Companies are being driven by financial and Wall Street pressures to turn their inventory quicker and get their products sold so they can collect the cash.”

As a result, leading-edge companies are creating these regional value chains, according to Cooke. “If I make goods for the U.S. market, I will set up my factories in Canada and Mexico as that allows me to get manufactured goods more quickly delivered and hence more likely to be sold faster, thus collecting cash,” he says.

However, reshoring manufacturing operations to Canada and the U.S. is not a step to take lightly. Many legal considerations must be observed. “If considering reshoring your operations, it is important you understand contracts between you and foreign suppliers,” says Sarah Rathke, partner, Squire Patton Boggs LLP, who litigates supply chain disputes and advises businesses on supply chain issues. “While some North American companies assume Chinese contract manufacturers will not sue them if they violate the supply chain agreement by terminating it, this is not always true.”

For example, Rathke has started to see cases brought by Asian suppliers and contract manufacturers, alleging lost profits from wrongful termination. Reshoring can have many benefits, but OEMs need to ensure themselves against liability issues from former suppliers, according to Rathke.

Coming to North America

In addition to OEMs bringing manufacturing back to Canada and the U.S., European and other international-based companies have been expanding their new assembly operations in North America. For example, ASCO Industries, a leading aerospace manufacturer with sites in Belgium and British Columbia, has opened a new location in Stillwater, Oklahoma. With the help of longtime Canadian purchasing software partner Procurify, ASCO was able to start up its Oklahoma operations from scratch and obtain non-aerospace materiel including million-dollar heat treatment ovens.

However, OEMs do not necessarily have to go to the full extent that ASCO did in order to bring their manufacturing operations to the North American continent. Case in point, PartnerTech AB of Sweden provides a range of services in manufacturing, engineering and supply chain management to customers in North America, according to its website. “We’re a systems integration and electronics manufacturer on behalf of clients seeking expertise in forecasting, supply chain alternatives, distribution and management in capital investment,” says Gary Bruce, president and managing director, PartnerTech Inc., PartnerTech AB’s North American affiliate.

Of course, the main motivation for shoring manufacturing to North America is not primarily to create jobs domestically but to optimize the manufacturing model. This involves supply chain flexibility. “An adaptive supply chain is both lean and agile,” Bruce says. “This hybrid approach uses subcontractors in a variety of low cost locations to perform distinct manufacturing processes with final assembly completed close to the end user.” In turn, this frees capital, shortens the supply chain and reduces total cost, according to Bruce. “Using local suppliers close to the customer allows for customization of products and quicker entry into the market.”

Software makers: source globally, assemble locally

Contractors and system integrators are not the only ones to promulgate the idea that OEMs should get as close to their North American customers as possible. “OEMs are employing strategies to design products where the basic configuration can be completed in low-cost offshore locations and then transported into markets to be finished based on actual demand,” says Pawan Joshi, vice president, strategy, E2open, a provider of cloud-based software for supply-chain management. “Cloud-enabled supply chain processes anchored by OEMs are transforming a collection of disparate enterprises into business networks that can effectively work as a single virtual enterprise to deliver products.”

One OEM that does stay close—figuratively if not actually—to its Canadian customers is Xplore Technologies, which is in fact headquartered in Austin, Texas. This maker of mobile wireless PC computing systems engineers, develops, integrates and markets them to North American package couriers, public safety agencies, utilities and other organizations that have personnel in the field on a constant basis. Xplore has a number of Canadian customers including Canpar, Canadian Tire, EMS Niagara and Hydro One. All these groups use rugged mobile PCs in relatively small quantities, so it would make sense if they were only made on demand in proximity to end users. Because stockpiling them would entail unnecessary and expensive warehousing costs, according to some supply-chain experts.

“Assembling locally gives companies the opportunity to implement just-in-time inventory, ultimately reducing inventory carrying costs and providing increased speed and flexibility with cycle time,” says Chris Horacek, vice president, BravoSolution, a provider of strategic procurement solutions, “since the products don’t need to travel across the ocean to get to where they’re being consumed. It also allows companies to address quality problems quickly, since the production facility is in the neighborhood rather than across the globe.”

Going in reverse

As labor costs rise in China, that country’s relative human capital advantage continues to shrink and the logistical burden of shipping finished products to North America grows in comparison. With that trend in place, more OEMs will begin to question the wisdom of stretching their supply chains to the breaking point with offshore manufacturing.

Derek Handova

Derek Handova is a veteran journalist writing on various B2B vertical beats. He started out as associate editor of Micro Publishing News, a pioneer in coverage of the desktop publishing space and more recently as a freelance writer for Digital Journal, Economy Lead (finance and IR beats) and Intelligent Utility (electrical transmission and distribution beats).